Life Insurance: What Changes the New Finance Law?

The 2018 Finance Act significantly changed the taxation of life insurance. Heritage Insure presents all the changes that are shaking up one of the favorite investments of the French: increase in social levies, implementation of Flat Tax, and of course, the schedule of these measures.

These changes will unfortunately not participate in simplifying the tax framework of life insurance, already difficult to grasp before this reform that complicates it even more! It is difficult to know which plan applies when there are multiple criteria: subscription date, outstanding amount, date of payment, marginal income tax rate, etc. Do these problems of legibility of the taxation of life insurance contracts pose a risk for this inevitable savings? The complete point on taxation of the preferred placement of the French.

A change in the taxation of life insurance contracts

 A change in the taxation of life insurance contracts

The biggest change is undoubtedly the single flat-rate tax (PFU) of 30% for all contracts under 8 years and for contracts over 8 years if the outstandings are greater than 150 000 euros (or more contracts exceeding 150,000 euros outstanding for one person and 300,000 euros outstanding for a couple).

By this, we mean the taxation of revenues (interest, capital gains) while taking into account, for contracts over 8 years, the abatements already in force and which are maintained: for contracts over 8 years, you can still benefit every year from a rebate on the gains of the surrender of € 4,600 for a single person and € 9,200 for a couple .

For contracts of more than 8 years and whose assets are less than 150 000, the withholding tax of 7.5% is maintained, which must be added the social security contributions of 17.2% from 1 January 2018 (previously 15.5%), representing a tax rate of 24.7%.

However, the PFU is not automatic and you always have the option of choosing between the income tax scale and the single flat-rate discharge. Taxpayers with a lower effective tax rate may continue to pay income tax based on the marginal tax bracket on capital income.

Thus, it is necessary to know which are the most advantageous options according to its situation. For all contracts of less than 150,000 euros, regardless of prior art, the PFU is the preferred solution, unless you are located in the zero bracket of the income tax schedule. You will then have to opt instead for the IR scale.

For contracts over 150,000 euros over 8 years, the PFU increases taxation (30% of PFU against a taxation of 24.7% including PFL and social security before). However, you should choose the PFU (30%) on the IR scale that is only beneficial if you are in the marginal tax bracket at zero. On the other hand, for contracts of 150,000 euros of less than 4 years and between 4 and 8 years, the PFU reduces the tax (30% against 52,50% previously, a gain of 22,5% for the contracts of less 4 years, and 30% against 32.2% previously, a gain of 2.2% for contracts between 4 and 8 years).

Higher social security contributions for life insurance contracts

 Higher social security contributions for life insurance contracts

Another major novelty of the 2018 Finance Act, which will directly impact the taxation of life insurance: the increase in social security contributions, driven by a 1.7% increase in the CSG.

Social deductions continue their irresistible rise. While they were only 10.0% in 2001, they rose in 2013 to 15.5% and now pass with the law of finance 2018 to 17.2%. This increase will take place at 1 January 2018.

As a reminder, the social security contributions apply to all contracts without exception and are paid each year on the euro funds and during redemptions for the units of account.

In June 2017, Good Value for Money reported its valuation of 1.48% for the average rate paid (net of management fees) on funds in euros in 2017. By applying 17.2% of social security contributions, we would be a level of 1.23%. By integrating the inflation assumption of 1.20% posed by the Banque de France in June 2017, ” life insurance could therefore be closer to an average rate paid net of fees and net of inflation close to 0 % in 2017 “reports Good Value for Money. Be careful though, this statement is only true for the euro fund and explains why it is better to go for the return of investing also (or especially) on units of account with more or less risk depending on your objectives

Discover our file 10 criteria for choosing an investment fund

The taxation of your life insurance policy: concrete example

 The taxation of your life insurance policy: concrete example

And concretely, how is it going?

Regarding the fund in euros, remember that social security contributions are automatically retained each year.

Otherwise, the tax applies when a purchase (total or partial). It is up to you to indicate to your insurer if you wish to opt for the flat-rate deduction or the declaration in your income according to the scale of the income tax.

As a reminder: The flat tax rate (PFU) is 30% and the tax rate of the IR scale depends on your marginal tax bracket.

Contract of less than 4 years:

  • 30 %
  • Marginal tax bracket (14%, 30%, 0%, 41%, 45%) + social contributions (17.2% as of 1 January 2018)

Contract between 4 and 8 years:

  • 30 %
  • Marginal tax bracket (14%, 30%, 0%, 41%, 45%) + social contributions (17.2% as of 1 January 2018)

Contract beyond 8 years:

  • PFL: 7.5% + social contributions (17.2% from 1 January 2018), 24.7% from 1 January 2017 or 30% PFU compulsory for contracts of more than 150 000
  • Marginal tax bracket (14%, 30%, 0%, 41%, 45%) + social contributions (17.2% as of 1 January 2018)

Calendar of tax changes for life insurance

 Calendar of tax changes for life insurance

The application of the flat tax to the largest life insurance contracts is effective from September 27, 2017. That is to say that if an investor has on Wednesday, September 27, a capital of 150 000 euros already invested in life insurance, any additional payments made by this investor after this date will generate gains taxed at the rate of 30% at the time of the repurchase of the contract.

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